G.R. No.

200784               August 7, 2013

MALAYAN INSURANCE COMPANY, INC., PETITIONER,
vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.

FACTS:

On May 13, 1996, Malayan Insurance issued Fire Insurance Policy to PAP Co. for the latter’s
machineries and equipment located at Sanyo Building. The insurance, which was for Fifteen
Million Pesos (P15,000,000.00) and effective for a period of one (1) year, was procured by PAP
Co. for Rizal Commercial Banking Corporation (RCBC), the mortgagee of the insured
machineries and equipment.

After the passage of almost a year but prior to the expiration of the insurance coverage, PAP Co.
renewed the policy on an “as is” basis. Pursuant thereto, a renewal policy for the period May
13, 1997 to May 13, 1998 was issued.

On October 12, 1997 and during the subsistence of the renewal policy, the insured machineries
and equipment were totally lost by fire. Hence, PAP Co. filed a fire insurance claim with
Malayan in the amount insured.

Malayan denied the claim upon the ground that, at the time of the loss, the insured machineries
and equipment were transferred by PAP Co. to a location different from that indicated in the
policy. Malayan claims that PAP concealed a material fact in violation of Section 27 of the
Insurance Code when it did not inform Malayan of the actual and new location of the insured
properties.  It adds that PAP is guilty of misrepresentation upon a material fact in violation of
Section 45 of the Insurance Codewhen it informed Malayan that there would be no changes in
the original policy, and that the original policy would be renewed on an “as is” basis.

Contesting the denial, PAP Co. argued that Malayan cannot avoid liability as it was informed of
the transfer by RCBC, the party duty-bound to relay such information.

ISSUE:

            Whether or not Malayan should be held liable for the loss of the insured properties under
the fire insurance policy

RULING:

            The Court agrees with the position of Malayan that it cannot be held liable for the loss of
the insured properties under the fire insurance policy.

            With the transfer of the location of the subject properties, without notice and without
Malayan’s consent, after the renewal of the policy, PAP clearly committed concealment,
misrepresentation and a breach of a material warranty. Section 26 of the Insurance Code
provides:
Section 26. A neglect to communicate that which a party knows and ought to communicate, is
called a concealment.
Under Section 27 of the Insurance Code, “a concealment entitles the injured party to rescind a
contract of insurance.”

Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the
insurance contract in case of an alteration in the use or condition of the thing insured. Section
168 of the Insurance Code provides, as follows:

Section 68. An alteration in the use or condition of a thing insured from that to which it is
limited by the policy made without the consent of the insurer, by means within the control of
the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance.

Accordingly, an insurer can exercise its right to rescind an insurance contract when the
following conditions are present, to wit:

1) the policy limits the use or condition of the thing insured;

2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insured’s control; and
5) the alteration increases the risk of loss.

In the case at bench, all these circumstances are present. It was clearly established that the
renewal policy stipulated that the insured properties were located at the Sanyo factory; that
PAP removed the properties without the consent of Malayan; and that the alteration of the
location increased the risk of loss.

DOCTRINE:

Insurance Law; Alterations; Rescission; Under Section 168 of the Insurance Code, the insurer is
entitled to rescind the insurance contract in case of an alteration in the use or condition of the
thing insured.—Under Section 168 of the Insurance Code, the insurer is entitled to rescind the
insurance contract in case of an alteration in the use or condition of the thing insured. Section
168 of the Insurance Code provides, as follows: Section 68. An alteration in the use or condition
of a thing insured from that to which it is limited by the policy made without the consent of the
insurer, by means within the control of the insured, and increasing the risks, entitles an insurer
to rescind a contract of fire insurance. Accordingly, an insurer can exercise its right to rescind an
insurance contract when the following conditions are present, to wit: 1) the policy limits the use
or condition of the thing insured; 2) there is an alteration in said use or condition; 3) the
alteration is without the consent of the insurer; 4) the alteration is made by means within the
insured’s control; and 5) the alteration increases the risk of loss?